Reverse thrust

Temporary tax hike could end US fiscal stalemate

A temporary tax rise could be the key to ending the US fiscal stalemate. A decade ago, a budget surplus inspired an intended short-term cut. Why not do the same thing in reverse to fix a deficit? The new revenue, paired with entitlement reform, could put American debt on a safer path. And an expiration date should help Republicans come around.

The United States is inching closer to the edge of its fiscal cliff, a heap of automatically triggered tax increases and spending cuts that could spell recession in 2013. The two political parties remain far apart in negotiations for an alternative solution. Republicans snorted on Thursday at President Barack Obama’s opening salvo, which included $1.6 trillion in new tax hikes on wealthier Americans.

Since the president is insisting on raising revenue, why not counter-offer by meeting him nearly halfway and begrudgingly accepting his $600 billion from closing loopholes and deductions? Then, they could agree to raise rates, but only temporarily. Since an immediate tax rise could endanger any economic recovery, those increases could begin in 2015 and last for eight years. Then, while leaving in place the other reforms, schedule rates to permanently reset to current levels in 2023.

Of the $960 billion Obama wants from taxing the rich, he would still get $825 billion, according to Breakingviews calculations using Congressional Budget Office projections. Alternatively, if all rates were left to rise in two years, that would reap a whopping $4.7 trillion in the following eight. Either way, a short-term measure should satisfy Republicans in two ways: by eliminating their fear of harming wealthy job creators for another two years, while ensuring tax rates remain permanently at lower rates over the long run.

A balanced-budget amendment and serious reform of entitlement programs would have to accompany this plan. Without action, Medicare costs alone could rise from 3.7 per cent of US GDP in 2011 to 10 per cent by 2080, according to the Centers for Medicare and Medicaid Services. But as part of a bigger proposal, a temporary revenue windfall could send deficits over the cliff instead of the country.